The Dimon dilemma

Commentary: Should investors care if Dimon has two jobs?

CHAPEL HILL, N.C. (MarketWatch) — Should investors care whether Jamie Dimon is stripped of his chairman-of-the-board role at J.P. Morgan Chase, leaving him just the CEO role?

You’ll be forgiven if you think they should. An intense debate over Dimon’s current dual role has dominated corporate governance blogs for months now, and the oddsmakers are taking bets on what shareholders will decide to do at the bank’s annual meeting, scheduled for later this month.

But Andrew Metrick, a finance professor at the Yale School of Management, thinks the debate over Dimon’s dual roles is a “red herring.” The far more important question investors should be asking, he told me in an interview, is whether J.P. Morgan
JPM, -0.62%
has a corporate culture in which “responsiveness to shareholders” is taken seriously.

Metrick added that separating the CEO and board chairman roles doesn’t necessarily make a company more responsive. “In fact,” he continued, “it could make things worse.” After all, he reasoned, if a company is run as a dictatorship, then the net effect of separating the two major leadership roles simply creates a dual-dictator structure that doesn’t even have the advantage of efficiency that at least the single-dictator structure enjoyed.

Metrick’s focus on corporate culture generally, rather than on the possible virtues of separating the CEO and chairman-of-the-board roles, traces to a major study he helped to conduct a decade ago. Co-authored with Paul Gompers of Harvard and Joy Ishii of Stanford, the study — which appeared in the Quarterly Journal of Economics in February 2003 — found that the shares of companies that were most responsive to shareholders gained 8.5% more per year, on average throughout the 1990s, than companies that were the least responsive.

When quantifying a company’s shareholder responsiveness, the researchers came up with 24 different indicators. Those 24 did not include whether the CEO and board-chairman roles were held by different individuals.

How responsive to shareholders is J.P. Morgan? Metrick said he had no opinion one way or the other. But it’s worth noting that more than just a few believe the bank leaves something to be desired in this regard in not already ousting Dimon from the chairman role a year ago in the wake of revelations about the infamous “London Whale” trades that cost the bank more than $6 billion.

Traders watching Jamie Dimon, JPM

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Traders will keeping a close eye on JP Morgan on Monday as the vote to possibly strip CEO/Chairman Jamie Dimon of his dual role approaches.

I’m not so sure. There is some evidence suggesting that investors place too much importance on who is a company’s CEO. The best-performing companies, it often turns out, are those whose CEOs you’ve probably never even heard of. And if a company is mediocre, a “White Knight” CEO won’t save it.

One of the research studies that I find particularly compelling in this regard was reported on a decade ago by Jim Collins, in his book “Good To Great.” In conducting the research for that book, Collins identified companies in the Fortune 500 whose shares, at some point since the early 1960s, went from merely keeping up with the market itself to outperforming it by a margin of at least 3:1 over a period of at least 15 years. He then constructed a control group of similar companies that never underwent this transformation from good to great.

Collins found that the mediocre companies were far more likely than the great ones to appoint superstar CEOs as white knights. In fact, Collins told me in an interview a few years ago, more than two-thirds of these mediocre companies “tried the outside savior model, and it didn’t work.”

In contrast, more than 90% of the good-to-great companies appointed their CEOs from within, and those CEOs hardly met the criteria of being a superstar. They remained largely unknown to the outside world.

From this and other findings, Collins concluded that “bringing in a white knight to be CEO is a recipe for mediocrity.”

My hunch, therefore, is that investors who like J.P. Morgan’s stock now should view it as a buying opportunity if Dimon were to quit and the stock price were to pull back. That judgment may sound cruel, but if Dimon wants us to believe that he should not be responsible for the London Whale fiasco, then shouldn’t we also believe that he is largely oblivious of many of the profitable activities that are going on at the bank?

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